The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities
AbstractIn this paper we use a simple bureaucracy model of fiscal illusion to analyze the impact of intergovernmental grants on the cost efficiency of local jurisdictions. We find that a higher degree of redistribution within a system of fiscal equalization or an increase in the amount of grants received by a local jurisdiction leads to an extension of organizational slack or X-inefficiency in that jurisdiction. This theoretical prediction is tested by conducting an empirical analysis using a broad panel of German municipalities. The results of the empirical analysis are consistent with the theoretical findings and therefore support the existence of a negative incentive effect of intergovernmental grants on local authorities' cost efficiency. --
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Bibliographic InfoPaper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 08-051.
Date of creation: 2008
Date of revision:
Cost efficiency; Fiscal equalisation; Intergovernmental grants; Bureaucracy; Stochastic frontier analysis; German municipalities;
Find related papers by JEL classification:
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-13 (All new papers)
- NEP-EFF-2008-09-13 (Efficiency & Productivity)
- NEP-PBE-2008-09-13 (Public Economics)
- NEP-URE-2008-09-13 (Urban & Real Estate Economics)
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